How does SEIS affect Capital Gains Tax and when can I claim Loss Relief?

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are crucial in securing funding for early-stage startups. They offer some of the most generous tax incentives in the world to encourage investment in high-risk, early-stage companies.

A common question from investors is whether these reliefs apply only to Income Tax or if they cover Capital Gains as well. The answer is both. Investors can use these schemes to significantly reduce their Income Tax liability and either defer or exempt Capital Gains Tax (CGT).

In this article we explain reinvestment relief, disposal relief and how your investors can claim it when they invest through SEIS/EIS.

We'll cover:

What is Capital Gains Tax (CGT)?
Can I use relief on Income Tax, Capital Gains, or both?
What is reinvestment relief?
What is disposal relief?
When will you receive your tax relief?
How can you make a claim?
How can you get relief if you make a loss?
Using losses to reduce your gain
What is loss relief?

1. What is Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on the profit when you sell (or dispose of) something (an asset) that’s increased in value. The gain (i.e. the profit) you make is taxed, not the amount of money you receive.

2. Can I use relief on Income Tax, Capital Gains, or both?

Investors do not have to choose between types of relief. You can claim Income Tax relief (50% for SEIS or 30% for EIS) to reduce your yearly tax bill, and simultaneously benefit from Capital Gains Tax reliefs.

These CGT benefits come in two forms: you can avoid paying tax on the profit made from the SEIS/EIS shares themselves, and you can also use your investment to offset or defer tax owed on the sale of other, unrelated assets.

There are 2 capital gains tax reliefs within SEIS/EIS:

reinvestment relief, where a gain arising on a disposal of any asset is reinvested in shares in a company on which you get SEIS Income Tax relief.
disposal relief, where shares in a SEIS company are disposed of after having been held for 3 years and certain criteria are met.

3. What is a reinvestment relief?

When you dispose of an asset and make a gain, usually, you pay Capital Gains Tax for the tax year in which you dispose of the asset. Reinvestment relief enables an individual who has disposed of an asset to treat a maximum of 50% of the gain as exempt from Capital Gains Tax, where they have reinvested all or part of the amount of the gain in qualifying SEIS shares.

So let’s say you are investing your £50k worth of non-SEIS gains into a SEIS qualifying company, you will get £25k (50%) CGT on these original gains.

4. What is disposal relief?

If disposal relief is due you will not have to pay Capital Gains Tax on a gain when you dispose of your SEIS shares. The following conditions have to be met:

you must have held the SEIS shares for at least 3 years.
you must have received SEIS Income Tax relief in full on the whole of your subscription for the SEIS shares and none of the Income Tax relief must have been withdrawn.

If you withdraw a part of your Income Tax relief, you will only receive relief for the part you haven’t withdrawn.

So, if you hold shares for at least 3 years after investing in a company and did not withdraw from your Income Tax relief, you will not have to pay CGT for the gain you made from selling your shares. This means that if you invest £10k into a SEIS eligible company and the value of your shares doubles over the course of three years, you can keep the £10k gains without paying any CGT.

5. When will you receive your tax relief?

The relief is for the tax year in which the shares are issued. HMRC allows you to claw back your tax relief to the previous tax year. SEIS investors are limited to claiming a £200k maximum relief limit per tax year. If you don’t know the date of issue of your shares you can find it on your SEIS3 form.

6. How can you make a claim?

You must complete the claim form attached to the SEIS3 certificate you should receive from the company you’ve invested in and attach the form to the Capital Gains Tax summary pages of your tax return.

7. How can you get relief if you make a loss?

If you make a loss on a disposal of your SEIS shares at any time, you can set this loss against your chargeable gains. To find out your loss, you have to reduce the cost of your shares by the amount of any Income Tax relief (not withdrawn).

You can report losses on a chargeable asset to HMRC to reduce your total taxable gains. Losses used in this way are called allowable losses.

8. Using losses to reduce your gain

When you report a loss, the amount is deducted from the gains you made in the same tax year. If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.

9. What is loss relief?

If things don’t go as planned and you make a loss on your investment, you can claim loss relief. Loss relief allows you to offset a loss made on a SEIS company against either your CGT bill or Income Tax bill. This is different from other SEIS tax reliefs. You can claim loss relief either in the tax year when you realise the loss or the next tax year.

You can only claim loss relief equivalent to the rate of the highest income tax you pay. For example, if you pay income tax at a rate of 45%, you can claim up to 45% of your net loss in income tax relief.